The multiplier effect indicates that
A) a decline in the interest rate will cause a proportionately larger increase in investment.
B) a change in spending will change aggregate income by a larger amount.
C) a change in spending will increase aggregate income by the same amount.
D) an increase in total income will generate a larger change in aggregate expenditures.

Question

Quizplus · Accepted Answer

The multiplier effect refers to the idea that a change in spending will have a larger impact on aggregate income than the initial change in spending itself. This is because increased spending leads to increased income for the recipients of that spending, who in turn spend more themselves, leading to a further increase in income and so on. The magnitude of this effect depends on the marginal propensity to consume (MPC), or the fraction of additional income that is spent, with a higher MPC leading to a larger multiplier effect. Therefore, choice B correctly describes the concept of the multiplier effect.

The Multiplier Effect Indicates That